(e) No person shall be excused from attending and testifying or from producing books and records before the Commission or in obedience to the subpena of the Commission or in any cause or proceeding instituted by the Commission, on the ground that the testimony or evidence, documentary or otherwise, required of him may tend to incriminate him or subject him to a penalty or forfeiture; but no individual shall be prosecuted or subject to any penalty or forfeiture for or on account of any transaction, matter, or thing concerning which he is compelled, after having claimed his privilege against self-incrimination, to testify or produce evidence, documentary or otherwise, except that such individual so testifying shall not be exempt from prosecution and punishment for perjury committed in so testifying.

(f) The several departments and bureaus of the Government shall furnish the Commission, upon request, all records, papers, and information in their possession relating to any of the provisions of this Act.

SEC. 14. This Act shall not apply to any common carrier of property, persons, or messages, any corporation, insofar as engaged in radio broadcasting, subject to the Communications Act of 1934, to any banking corporation, any insurance corporation, any corporation engaged in publishing newspapers, magazines, or books, any corporation organized under the China Trade Act of 1922, or any corporaion the majority of the stock of which is held by the United States, unless such corporation herein before exempted shall. through stock ownership, voting trust or trusts, holding company or companies, or by any other device or means, direct or indirect, acquire, for the purpose of controlling or influencing the management of any corporation subject to this Act, any interest in or control of any such corporation subject to this Act, in which case this Act shall apply to such corporation hereinbefore exempted.

RULES, REGULATIONS, AND FEES

SEC. 15. The Commission is authorized to prescribe, amend, and modify such rules and regulations, not inconsistent with the provisions of this Act, as may be necessary to carry out the purposes of this Act. The Commission shall prescribe and collect such fees for the issuance of licenses as may be reasonably necessary to cover the costs thereof, and the moneys so collected shall be covered into the Treasury as miscellaneous receipts.

MISCELLANEOUS PROVISIONS

SEC. 16. Every contract make in violation of this Act shall be void, and no corporation or association shall bring or maintain any suit or proceeding in any court of the United States unless it is organized, conducted, and managed as required by the conditions imposed in section 5 of this Act, but this provision shall not prevent the removal to any court of the United States of any such suit or proceeding when the petition for such removal is filed by any party otherwise entitled to be heard in such court.

SEC. 17. No person or persons shall form, operate, or act as or for a corporation or association for the purpose or with the effect of violating this Act, or conspire thereto and of himself or by a co-conspirator do any act or thing to effect such conspiracy.

SEC. 18. Every corporation, association, or person violating any of the provisions of this Act shall, upon conviction thereof, in the case of a corporation or an association, be subject to a fine not exceeding per centum of its capital stock, or to a perpetual injunction against engaging in commerce, or both, and, in the case of a person, shall be subject to a fine not exceeding $10,000, and, if the violation is willful with intent to defraud or to violate any Act of Congress to such fine and to imprisonment for not exceeding five years.

SEC. 19. No person shall be eligible to serve as an officer or director of any licensee unless he is an actual owner of stock in the licensee. Unless otherwise provided herein, no director or officer of a licensee shall be a stockholder or employee of any other corporation engaged in the same business, nor shall any such director or officer be a director, officer, or employee of any corporation which has advanced or loaned money or property to such licensee. Every officer and director of any licensee shall be a trustee of the stockholders of such licensee and shall be liable to such stockholders in actual and punitive damages for any money or property that may be paid or transferred to any other corporation in which he may be an officer or director or in which he may own more than 5 per centum of the corporate stock or other securities. No officer or director of any licensee shall, directly or indirectly, or by any device whatsoever take any profit to him

self as a result of the trust reposed in him save only such compensation as may be regularly awarded to him by vote of the board of directors.

SEC. 20. The Civil Service Commission is authorized and directed to issue certificates, upon application, to persons whom it finds to be properly qualified and familiar with corporation and commercial law and corporate accounting, authorizing such persons to act as certified corporation representatives for the purposes of this Act. The Civil Service Commission is authorized to prescribe such rules and regulations, and to conduct such examinations as may be necessary for the purposes of this section. The Civil Service Commission shall prescribe and collect such fees for such examinations as may be reasonably necessary to cover the costs thereof, and the moneys so collected shall be covered into the Treasury as miscellaneous receipts. The Civil Service Commission may, for cause, after notice and hearing, revoke any such certificate; and if any person who has not received such a certificate, or whose certificate shall have been revoked, shall hold himself out to act as a certified corporation representative under this Act, he shall be deemed guilty of a misdemeanor; and, upon conviction thereof by any court of record of the jurisdiction in which the offense was committed, he shall be fined not more than $1,000 for each such offense. The Civil Service Commission shall not establish any requirement under this section which will prevent the issuance of certificates to persons other than attorneys at law. Nothing in this Act shall be construed to prohibit a person other than a certified corporation representative from acting as the proxy of a stockholder in any corporation.

SEC. 21. If any provision of this Act, or the application thereof to any person or circumstances, is held invalid, the remainder of the Act, and the application of such provision to other persons and circumstances, shall not be affected thereby. SEC. 22. The right to alter, amend, or repeal this Act, or any part thereof, is hereby expressly reserved.

SEC. 23. This Act may be cited as the "Corporation Licensing Act of 1938". Amend the title so as to read: "A bill to regulate interstate and foreign commerce by prescribing the conditions under which corporations may engage in such commerce, to provide for and define additional powers and duties of the Federal Trade Commission, and for other purposes."

Senator O'MAHONEY. I should like to have those present and who desire to be heard indicate at the present time, so the committee may be able to organize the hearings. I understand there are two representatives here from the National Association of Manufacturers. One is Mr. Cunningham. I understand the other is detained before another committee. Are there any other spokesmen here in behalf of the National Manufacturers Association?

Mr. JOHN D. BATTLE. Mr. Chairman, I represent the National Coal Association, and would like to be heard very briefly.

Senator O'MAHONEY. Is there anyone else?

Mr. BEN C. MARSH. I represent the People's Lobby, and am in favor of the principle of this bill.

Senator O'MAHONEY. I am glad to hear you make that announcement. Are there any other persons here who desire to be heard on either side?

I have requested Mr. Robert O'Brien of the Securities and Exchange Commission staff to appear here this morning and discuss for the benefit of the committee some of the facts with relation to corporate organizations. Perhaps I might state that Mr. O'Brien is not here as an advocate or opponent of the measure, but at our invitation to develop the facts with respect to the effect of corporate organizations upon interstate commerce, as developed by the investigation of the Securities and Exchange Commission.

Mr. O'Brien, will you be good enough to take the stand?

STATEMENT OF ROBERT H. O'BRIEN, ASSISTANT DIRECTOR, REGISTRATION DIVISION, SECURITIES AND EXCHANGE COMMISSION

Mr. O'BRIEN. That is correct, Senator; not alone, however, as the product of our investigations, but likewise facts which are stated in registration statements filed under the provisions of the Securities Act and the Securities and Exchange Act.

Senator O'MAHONEY. Please give your name to the reporter, Mr. O'Brien.

Mr. O'BRIEN. Robert H. O'Brien.

Senator O'MAHONEY. And the position you occupy.

Mr. O'BRIEN. Assistant Director of the Registration Division of the Securities and Exchange Commission.

Senator O'MAHONEY. What are your duties in that capacity?

Mr. O'BRIEN. My duties are to supervise the examination and make recommendations as to the disposal of approximately one-half of the registration statements filed under the Securities Act of 1933. I also come in contact collaterally with problems which arise under the Securities and Exchange Act of 1934, although I have nothing to do with the disposition of those cases.

Senator AUSTIN. Is your work divided geographically?

Mr. O'BRIEN. No; it is not. I might add that it is not divided on the basis of any classification of companies into types.

Senator O'MAHONEY. You may proceed, Mr. O'Brien, with your

statement.

Mr. O'BRIEN. May I preface what I have to say by stating that this material has been somewhat hastily assembled, and covers only a portion of what we have in the Securities and Exchange Commission.

The first thing that may be of interest, in connection with a bill of the kind which the committee is considering is the general practice of corporations with respect to considering reports to securities holders, for the purpose of informing them as to the progress and condition of the enterprise. Many registration statements filed under the Securities Act show that a large number of corporations make no reports whatever to their securities holders. In many instances in which reports are made, the content of the reports is not such as to inform the persons to whom the reports are directed of the true condition of the business. There are either omissions to state certain facts which are of vital importance in determining the exact position of the company financially and its position in the industry in which it is engaged in business, or certain facts which are affirmatively stated may be misstated or stated in a misleading fashion.

Senator AUSTIN. Will you permit a question at this point?

Mr. O'BRIEN. Surely.

Senator AUSTIN. Does the Commission make any recommendation for uniformity in the style of reports by corporations to anybody, to the Commission, to the stockholders, or to anyone else?

Mr. O'BRIEN. We do have authority to prescribe the form and content of certain reports required to be filed with us, but that is by no means a complete covering.

Senator AUSTIN. Is that because of the law or because of the administration of the law?

Mr. O'BRIEN. I would not say it is either of those. Senator AUSTIN. It is a matter that could be easily remedied; is it not?

Mr. O'BRIEN. Our jurisdiction under the Securities and Exchange Act extends only to companies whose securities are listed on a national exchange. The 1933 Securities Act extends only to the initial public offering and distribution of securities in interstate commerce. From that you can perceive how our jurisdiction is limited under those two statutes. I think I should amplify what I said in answering your last question, by saying that we have no power whatsoever to prescribe the form which reports to stockholders shall take.

Senator O'MAHONEY. You do not have any power over the corporate structure of the registrant, but to what extent does your power go?

Mr. O'BRIEN. I might say in general terms that we have no power whatsoever over the internal affairs of corporations, whether we think they are conducted wisely or unwisely, nor do we have any authority to prescribe the form of any corporation's capital structure. Our act only requires that the material facts relating to the enterprise be stated truthfully and completely, whether they be good or bad, and then only in those instances I have described where we have jurisdiction.

Senator BORAH. You have no control or jurisdiction over the terms or conditions of granting a charter to a corporation?

Mr. O'BRIEN. None whatsoever. We are not able to dictate or even suggest the terms of the charter.

Senator O'MAHONEY. Mr. O'Brien, you may proceed with your

statement.

Mr. O'BRIEN. Another set of cases which come before us quite frequently are those involving the issuance of stock in exchange for services or property, either at or shortly after the organization of the corporation. The usual thing, although it is not 100 percent uniform, is for the promoters who bring the corporation into existence to act, after incorporation, as the board of directors, or be in a position to control or dominate the persons chosen to be members of the board of directors. The property which has been acquired by the promoters or in their name and behalf is transferred to the corporation in exchange for stock. Our experience in that respect is that in many cases, perhaps a majority of the cases, the primary motive of those promoters, who stand on both sides of the transaction, is to obtain and retain control of the corporation. Shares are issued without regard to the value of the assets which are turned over to the corporation. We had one very striking case which illustrates this practice.

It may, at the same time, clarify somewhat the nature of our approach to these problems and indicate the extent of our authority under the statute.

A balance sheet was filed containing an item of property in the amount of $71,000. The amount $71,000 represented the amount due on a mortgage held by the vendor of the property $26,000 and the aggregate par value of 45,000 shares of stock issued to the promoter. We inquired into the nature of the transaction through which the property was acquired and as a result concluded that only $26,000 was properly allocable to property. The balance of $45,000, represented by 45,000 shares of $1 par stock was properly allocable to something

We

else, even though it had been included in the property account. raised the question of the propriety of including the 45,000 shares in the property account. The balance sheet was then revised to state that the 45,000 shares had been issued to the promoters in exchange for services rendered to the corporation.

The Commission held a hearing under section 8 to determine whether the representation that 45,000 shares of $1 par stock had been issued for services was true. The evidence established that the services were of a negligible character. The time spent and the ability of those who had rendered the services were not such as to indicate that anything closely approaching $45,000 in value had been received by the corporation. The Commission took the position that because of the great disparity between the aggregate par of the stock and the value of the services rendered to the corporation, a substantial portion of those shares which were represented to have been issued in exchange for services had actually been given to the promotIt held that the corporation had not received $45,000 in value, as was represented but something substantially less than $45,000, and that consequently a large part of the stock issued constituted a gift to the promoters.

ers.

Senator AUSTIN. May I ask you a question at this point?
Mr. O'BRIEN. Yes.

Senator AUSTIN. Do you happen to recall whether you investigated the authority of those promoters, or those who signed the articles of incorporation, to make such an issue without an affidavit filed with the Secretary of State or commissioner of corporations of that State in which it was chartered, showing that a part of the stock was issued for services, and what part was so issued, and requiring good faith in the affidavit to support that issue? Do you recall whether you inquired into that? .

Mr. O'BRIEN. I will answer that in this way: I do not even recall the State laws under which that particular corporation was organized. I do not know offhand any State corporation law which would require something of the nature that you now suggest.

Senator AUSTIN. You do not know of any?

Mr. O'BRIEN. I do not know of any, in those precise terms. I know of general procedures of that kind which are provided for in State corporation acts. I would say, however, that that type of case occurs frequently in States whose laws contain general provisions of that character, if not exactly such as you have described.

Senator O'MAHONEY. Mr. O'Brien, is it not a fact that practically all the corporations which register with the Securities and Exchange Commission are corporations which are desirous of selling their stock to the public?

Mr. O'BRIEN. That is correct. Under the 1933 act that is the whole of it.

Senator O'MAHONEY. So for the purposes of this discussion and the effect of this bill, there are two types of corporations, are there not: No. 1, the corporation which is closely held, the stock of which is not offered to the public for sale, the corporation therefore being owned by those who manage it; and that there is a second type, namely, the ones with which the Securities and Exchange Commission has been primarily dealing, the stock of which is more or less widely distributed among the people at large, so the stockholders are not in the position,